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Volatility – how far will price move in a particular direction? Momentum – how many times will price range before breaking out?

(Last Updated On: October 21, 2011)

Volatility – how far will price move in a particular direction? Momentum – how many times will price range before breaking out? Probability – when will the inevitable breakout occur?

As a technical analyst, I am always researching more accurate ways of measuring these 3 factors which I believe drive the FX markets. For those who agree with me, what approach/TA tools best measure these, separately or in tandem?

3 factors which drive fx market are import/export companies changing currencies, major banks trading for their portfolios and their clients, and lots of bucketshops hedging their net positions. Momentums, breakouts and other technical things are only attempts to formalize repeating patterns coming out of those above mentioned 3 factors. Do not confuse the cause with the consequences.

 

You do not necessarily need to know the cause to exploit the consequence. At the end of the day, the supply and demand battle takes place on the charts. Sometimes, less is more…

 

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There are many definitions of the 3 concepts – Volatility, Momentum and Probability (Eventuality), which is why I explained them in my own words. Yes, they do not “drive” the markets, but my paradigm is that the move of the markets, once they are driven, can be defined using these parameters. So, are there other parameters that I may have left out?

 

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I doubt if you can exploit the consequences of, say, BMW or Toyota trading
euro for yen to simply pay their counteragents in EU or Japan. Or can you?

As to “parameters” you mention — there are price, time and volume (traded
and in the order book). For several types of instruments there is also open
interest. That’s all. Everything else is a derivative of any sort, which
can be used for describing market events of any sort, but not vice versa.

Have you ever pondered upon the fact that the absolute majority of authors
play with terms like “momentum” and “volatility” without any formal
definition of the terms? That they prefer to use “intuitively clear” terms
like “trend” with a good deal of arbitrariness in their usage?

 

I struggled with the application of volatility and momentum for many years. It got me nowhere. Ultimately the market is a random series of events made by very large players. My solution to understanding what was happening was to take a 1M chart and overlay it upon a 1H block (I started with Syd open as 1H block #1). It soon became obvious which blocks and which parts of the block the market-movers preferred. It also highlighted the idea that randomness was limited in that price runs (up or down) occured within the same group of 1H blocks.

I then overlayed (or tried to) the daily routines of fund managers onto each of these blocks to try to get a picture of why price jumped as it did. Such analysis gives you the obvious trading hours (open/close of Sydney, Tky, Frankfurt spike, London open/close, NY open/close). It also hints at times when something may happen (or not). There are also strong moves following news announcements. At the very least you get times when you can switch off/backup or modify your code.

All of this was easily coded. My explanation probably has some strategy or formal theory that has already been provided in threads. However after looking through threads for a long time I found it easier to develop the system from first principals rather than try to translate existing language/stuff.

 

 

NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!

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